|12 Months Ended|
Jun. 30, 2018
|Income Tax Disclosure [Abstract]|
NOTE 12 — INCOME TAXES
The components of income before income taxes are as follows:
The provision for income taxes is comprised of the following:
The significant components of deferred income tax assets and liabilities are as follows:
The Company’s effective tax rate during the fiscal year ended June 30, 2018 was impacted by the Tax Cuts and Jobs Act (“the Act”), which was enacted into law on December 22, 2017. Income tax effects resulting from changes in tax laws are accounted for by the Company in accordance with the authoritative guidance, which requires that these tax effects be recognized in the period in which the law is enacted and the effects are recorded as a component of provision for income taxes from continuing operations. The Company has not fully completed its accounting for the tax effects of the enactment of the Act.
The Act includes significant changes to the U.S. corporate income tax system which reduces the U.S. federal corporate tax rate from 35.0% to 21.0% as of January 1, 2018; shifts to a modified territorial tax regime which requires companies to pay a transition tax on earnings of certain foreign subsidiaries that were previously tax deferred; and creates new taxes on certain foreign-sourced earnings. The decrease in the U.S. federal corporate tax rate from 35.0% to 21.0% results in a blended statutory tax rate of 28.1% for the fiscal year ending June 30, 2018. The new taxes for certain foreign-sourced earnings under the Act are effective for the Company after the fiscal year ending June 30, 2018
As of June 30, 2018, the Company had not fully completed its accounting for the tax effects of the enactment of the Act. The Company’s provision for income taxes for the fiscal year ended June 30, 2018 is based in part on a reasonable estimate of the effects on its transition tax and existing deferred tax balances. For the amounts which the Company was able to reasonably estimate, the Company recognized a provisional tax amount of $441.7 million for the fiscal year ended June 30, 2018. The provisional tax amount is included as a component of provision for income taxes from continuing operations. The components of the provisional tax amounts are as follows:
The Act also includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of foreign corporations. This income will effectively be taxed at a 10.5% tax rate in general. As a result, the Company’s deferred tax assets and liabilities are being evaluated if the deferred tax assets and liabilities should be recognized for the basis differences expected to reverse as a result of GILTI provisions that are effective for the Company after the fiscal year ending June 30, 2018, or should the tax on GILTI provisions be recognized in the period the Act was signed into law. Because of the complexity of the new provisions, the Company is continuing to evaluate on how the provisions will be accounted for under the U.S. generally accepted accounting principles wherein companies are allowed to make an accounting policy election of either (i) account for GILTI as a component of tax expense in the period in which the Company is subject to the rules (the “period cost method”), or (ii) account for GILTI in the Company’s measurement of deferred taxes (the “deferred method”). Currently, the Company has not elected a method and will only do so after its completion of the analysis of the GILTI provisions and its election method will depend, in part, on analyzing its global income to determine whether the Company expects to have future U.S. inclusions in its taxable income related to GILTI and, if so, the impact that is expected.
As of June 30, 2018, the Company had U.S. federal, state and foreign net operating loss (“NOL”) carry-forwards of approximately $23.4 million, $43.1 million and $42.1 million, respectively. The U.S. federal NOL carry-forwards will expire at various dates beginning in 2023 through 2029. The utilization of NOLs created by acquired companies is subject to annual limitations under Section 382 of the Internal Revenue Code. However, it is not expected that such annual limitation will significantly impair the realization of these NOLs. The state NOLs will begin to expire in 2018. State credits of $191.1 million and foreign NOL carry-forwards will be carried over indefinitely.
The net deferred tax asset valuation allowance was $163.6 million and $120.7 million as of June 30, 2018 and June 30, 2017, respectively. The change was primarily due to an increase in the valuation allowance related to state credit carry-forwards generated in the fiscal year ended June 30, 2018. The valuation allowance is based on the Company’s assessment that it is more likely than not that certain deferred tax assets will not be realized in the foreseeable future. Of the valuation allowance as of June 30, 2018, $145.4 million relates to state credit carry-forwards. The remainder of the valuation allowance relates primarily to state and foreign NOL carry-forwards.
As of June 30, 2018, the Company intends to indefinitely reinvest $2.15 billion of cumulative undistributed earnings held by certain non-U.S. subsidiaries. The U.S. federal tax liability on the undistributed earnings has been accrued in the transition tax under the Act. The potential deferred tax liability on state and foreign taxes associated with the undistributed earnings would be approximately $270.5 million.
KLA-Tencor benefits from tax holidays in Israel and Singapore where it manufactures certain of its products. These tax holidays are on approved investments and are scheduled to expire at varying times in the next one to ten years. The Company was in compliance with all the terms and conditions of the tax holidays as of June 30, 2018. The net impact of these tax holidays was to decrease the Company’s tax expense by approximately $39.7 million, $32.6 million and $19.5 million in the fiscal years ended June 30, 2018, 2017 and 2016, respectively. The benefits of the tax holidays on diluted net income per share were $0.25, $0.21 and $0.12 for the fiscal years ended June 30, 2018, 2017 and 2016, respectively.
One of the Company’s Singapore holidays is scheduled to expire in August 2018. The Company’s tax rate on income earned under this holiday would increase from 5% to 17%.
The reconciliation of the United States federal statutory income tax rate to KLA-Tencor’s effective income tax rate is as follows:
A reconciliation of gross unrecognized tax benefits is as follows:
The amount of unrecognized tax benefits that would impact the effective tax rate was $57.9 million, $68.4 million and $50.4 million as of June 30, 2018, 2017 and 2016 respectively. The amount of interest and penalties recognized during the years ended June 30, 2018, 2017, and 2016 was expense of $0.1 million, expense of $2.2 million, and income of $4.3 million as a result of a release of unrecognized tax benefits, respectively. KLA-Tencor’s policy is to include interest and penalties related to unrecognized tax benefits within other expense (income), net. The amount of interest and penalties accrued as of June 30, 2018 and 2017 was approximately $6.0 million and $5.9 million, respectively.
The Company is subject to federal income tax examinations for all years beginning from the fiscal year ended June 30, 2015 and is under United States federal income tax examination for the fiscal year ended June 30, 2016. The Company is subject to state income tax examinations for all years beginning from the fiscal year ended June 30, 2014. The Company is also subject to examinations in other major foreign jurisdictions, including Singapore, for all years beginning from the fiscal year ended June 30, 2014.
It is possible that certain examinations may be concluded in the next twelve months. The Company believes that it may recognize up to $10.0 million of its existing unrecognized tax benefits within the next twelve months as a result of the lapse of statutes of limitations and the resolution of examinations with various tax authorities.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://www.xbrl.org/2003/role/presentationRef